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Putting On The Brakes

Julian Darley, Post Carbon Institute
News of contraction in the auto industry and beyond signals more than the end of an economic cycle

We are starting to grow used to reading about news of contraction, but the contraction is happening by accident instead of by design. For example, this week has brought more news of dramatic falls in the sales of new cars in the USA and globally. No matter what your opinion of cars and the wider car industry, this contraction undoubtedly means many people will lose their jobs. This will cause worry, sadness, and hardship on top of all the other news of an economic system in deep trouble. Yet knowledge of the future of global oil supply points to an industry which is about to undergo massive transformation and most likely painful shrinkage.

Contraction Bites
According to Autodata and AP, the October 2008 “seasonally adjusted annual sales rate of 10.6 million vehicles was the worst since February 1983 and far below the rate of 16 million a year earlier.”1 The figures include all light autos, which means cars, SUVs, and light trucks – less than 8,500 lbs with load. Furthermore, the October figure was sharply down from September’s already low 12.5 million.2… specifically, GM sales fell 45 percent on last year’s October, Ford was down 30% and even Toyota and Honda were off about 25%.3 Mike DiGiovanni, a GM sales analyst, says “this is clearly a severe, severe recession for the U.S. automotive industry and something we really can’t sustain”.4

… A contracting auto industry is likely to mean less cars on the road, less petroleum used, and less GHG emissions, all of which has been predicted and all of which will help the climate, the environment, and in theory could lead to a much better world for humans. The trouble is this contraction is happening amidst more or less blind ignorance on the part of most manufacturers and most governments. At least ostensibly, there is no sign that they understand that the rate of global oil supply is reaching its maximum and that this is not just one more business cycle but the start of something new.

When will this realization happen? The publication of a dramatic new report by the International Energy Agency, already leaked to the Financial Times, along with a change of government in America, may at last begin to change the direction of policy makers and politicians. November looks set to prove an interesting month.
(5 November 2008)

Inside Commodities: Is the Bull Run Over, or Just Taking a Break?

Grace Cheng, Seeking Alpha
On Monday (3 Nov 2008) I attended the Inside Commodities conference at the New York Stock Exchange (NYSE). … The event was organized as a series of panels covering different types of commodities from metals to agriculture and included panelists such as renowned investor Jim Rogers. …

Almost all the panelists were in agreement that the short-term outlook for commodities was bearish. The average time frame given for the continued bearishness was at least another 9-18 months. Jim Rogers, though, thinks that commodities are in a secular bull market and that the current retracement is simply caused by forced liquidation and deleveraging, and can’t be considered a real bear market.

… Oil

Most panelists agreed with the peak-oil theory and that it was far easier to get more output of natural gas than of oil. However, most think that price pressures on oil could remain low for some time as demand has slowed and Saudi Arabia has been working to keep prices down for geopolitical reasons – primarily to prevent rivals Iran, Russia and Venezuela from getting too strong.

Hedge fund managers have said that they are short for the short-term but that they plan to go long as soon as demand pressures pick up or the low prices push the supplies down sufficiently to cause a potential future shortage.

… Industrial Metals

This was probably the commodity that panelists were most bearish on. Supplies have grown tremendously in the past few years as prices surged, and China is a large producer of many of these metals.

… Agriculture

In contrast to Industrial Metals, agriculture is the commodity that panelists were most bullish on, in particular Jim Rogers. The bullishness is due mainly to the world’s expanding population and the fact that even in a downturn, people will need to eat.
(5 November 2008)

Jeff Rubin: Oil Prices Caused the Current Recession

Gail Tverberg, The Oil Drum
Jeff Rubin, Chief Economist at CIBC World Markets, in a recent report, is now saying that the current recession is caused by high oil prices. Defaulting mortgages are only a symptom of the high oil prices. We should be blaming the underlying cause–higher oil prices–rather than the symptom. These higher oil prices caused Japan and the Eurozone to enter into a recession even before the most recent financial problems hit. Higher oil prices started four of the last five world recessions; we shouldn’t be too surprised if they started this one also.

… Comments

Based on the last two observations quoted, I would conclude that Jeff Rubin expects the economy to zig-zag in the future, first hitting a low point, and then a new high, and then a low point again. If peak oil is part of the equation, I would expect the height of the highs to gradually decline, and the depth of the lows to get progressively lower.

The question I have is with respect to his statement, “If triple-digit oil prices are what started the recession, then $60 oil prices are what will end it.” I would agree that lower oil prices are necessary to end the recession, but it is not clear to me that they are sufficient.

It seems to me that we have a different problem at this time–a barely functioning financial system that governments around the world are trying to bail out. We also have a vastly oversized financial services industry that needs to collapse to a more reasonable size. In addition, there is a problem with non-availability of credit.

It seems to me that the problem with non-availability of credit, particularly long-term debt, is ultimately tied in with peak oil. It is difficult to have more than a tiny amount of long term debt once an economy is no longer growing. Repaying long-term debt is relatively easy in an economy which is growing, since funds available to pay back debt are greater in the future than they are at the time the debt is incurred.

In a declining economy, it is likely that either there will be many defaults, or that the debt will be paid back with dollars that are worth much less than when the loan was taken out. Because of these issues, lenders will raise interest rates to such a high level that few projects will generate a high enough rate of return to justify taking out these loans. I believe that ultimately long term debt will essentially disappear–but perhaps not for several years.

Unless we can get world’s financial problems worked out, it seems to me that it will be difficult for the economy to get back to business as usual. Instead, we will find more workarounds like Thailand’s recent rice for oil deal or China’s $25 billion loan to Russia in return for oil. Without a solution, we are likely to have a continued recession. If the financial problems suddenly take a turn for the worse–say, the US dollar is no longer the reserve currency, the US economic situation could take a sudden large step downward.
(5 November 2008)